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Mandates and the Incentive for Environmental Innovation

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Abstract

Mandates are policy tools that are becoming increasingly popular to promote renewable energy use. In addition to mitigating the pollution externality of conventional energy, mandates have the potential to promote R&D investments in renewable energy technology. But how well do mandates perform as innovation incentives? To address this question, we develop a partial equilibrium model with endogenous innovation to examine the R&D incentives induced by a mandate, and compare this policy to two benchmark situations: laissez-faire and a carbon tax. Innovation is stochastic and the model permits an endogenous number of multiple innovators. We find that mandates can improve upon laissez faire, and that the prospect of innovation is essential for their desirability. However, mandates suffer from several limitations. A mandate creates relatively strong incentives for investment in R&D in low-quality innovations, but relatively weak incentives to invest in high-quality innovations, so that the dispersion of realized innovation quality is comparatively low. Moreover, a mandate achieves lower welfare than a carbon tax, and its optimal level is more sensitive to the structure of the innovation process. Key Words: Carbon tax, Incentive, Innovation, Mandates, Renewable energy, R&D, Welfare. JEL codes: H23, O31, Q42, Q55, Q58

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  • Matthew S. Clancy & GianCarlo Moschini, 2015. "Mandates and the Incentive for Environmental Innovation," Center for Agricultural and Rural Development (CARD) Publications 15-wp557, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  • Handle: RePEc:ias:cpaper:15-wp557
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    Cited by:

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    2. Lade, Gabriel E. & Lin Lawell, C.-Y. Cynthia, 2015. "The design and economics of low carbon fuel standards," Research in Transportation Economics, Elsevier, vol. 52(C), pages 91-99.
    3. Nguyen Thi Thanh Huyen & Pham Hong Chuong & Nguyen Thi Thu Ha & To Trung Thanh & Le Thanh Ha, 2024. "Time-varying interrelations between digitalization and human capital in Vietnam," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-13, December.
    4. Yeh, Sonia & Witcover, Julie & Lade, Gabriel E. & Sperling, Daniel, 2016. "A review of low carbon fuel policies: Principles, program status and future directions," Energy Policy, Elsevier, vol. 97(C), pages 220-234.
    5. Madhu Khanna & Ruiqing Miao, 2022. "Inducing the adoption of emerging technologies for sustainable intensification of food and renewable energy production: insights from applied economics," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 66(1), pages 1-23, January.
    6. Gabriel E. Lade & C.-Y. Cynthia Lin Lawell, 2021. "The Design of Renewable Fuel Mandates and Cost Containment Mechanisms," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 79(2), pages 213-247, June.
    7. Gabriel E Lade & C -Y Cynthia Lin Lawell & Aaron Smith, 2018. "Policy Shocks and Market-Based Regulations: Evidence from the Renewable Fuel Standard," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(3), pages 707-731.
    8. Guillouzouic-Le Corff, Arthur, 2018. "Did oil prices trigger an innovation burst in biofuels?," Energy Economics, Elsevier, vol. 75(C), pages 547-559.
    9. Beaudoin, Justin & Chen, Yuan & Heres, David R. & Kheiravar, Khaled H. & Lade, Gabriel E. & Yi, Fujin & Zhang, Wei & Lin Lawell, C.-Y. Cynthia, 2018. "Environmental Policies in the Transportation Sector: Taxes, Subsidies, Mandates, Restrictions, and Investment," ISU General Staff Papers 201808150700001050, Iowa State University, Department of Economics.
    10. Ha, Le Thanh & Nam, Pham Xuan & Thanh, To Trung, 2021. "Effects of Bribery on Firms' Environmental Innovation Adoption in Vietnam: Mediating Roles of Firms' Bargaining Power and Credit and Institutional Constraints," Ecological Economics, Elsevier, vol. 185(C).
    11. Jose L. Arroyo & Ángel Felipe & M. Teresa Ortuño & Gregorio Tirado, 2020. "Effectiveness of carbon pricing policies for promoting urban freight electrification: analysis of last mile delivery in Madrid," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 28(4), pages 1417-1440, December.
    12. Clancy, Matthew & Moschini, GianCarlo, 2016. "Pushing and Pulling Environmental Innovation: R&D Subsidies and Carbon Taxes," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235710, Agricultural and Applied Economics Association.
    13. Gabriel E Lade & C-Y Cynthia Lin Lawell & Aaron Smith, 2018. "Designing Climate Policy: Lessons from the Renewable Fuel Standard and the Blend Wall," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 100(2), pages 585-599.

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    More about this item

    Keywords

    carbon tax; incentive; innovation; mandates; renewable energy; r&d; welfare. jel codes: h23; o31; q42; q55; q58;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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